Despite the impending economic slowdown, the Reserve Bank of India (RBI) is expected to maintain its hawkish stance by raising the key policy rate by 25 basis points. According to economists, high inflation remains a bigger concern than the slowdown in growth.
According to data released on Monday, the index of industrial production (IIP) for July stood at 3.3 per cent. Wholesale price index-based inflation stood at 9.22 per cent in July, much above the central bank’s comfort zone. Economists have said given the volatility in the trend of industrial production data and the fact that inflation numbers are often revised upwards, RBI was unlikely to change its stance for now.
“Perhaps the focus should be on the fact that the cumulative industrial production growth this financial year has been 5.8 per cent, which suggests a stronger economy than that suggested by July data,” said Deutsche Bank economists Taimur Baig and Kaushik Das.
According to a survey of 31 economists by Reuters, the headline inflation forecast for August ranged from 8.8 per cent to 10 per cent. The central bank has projected March-end inflation at seven per cent.(Click here for graph)
“RBI does not take decisions on the basis of one parameter alone. IIP data is very volatile,” said Crisil chief economist D K Joshi. However, Goldman Sachs economists Prakriti Shukla and Vishal Vaibhaw have made a case for a pause in policy rates, owing to the slowdown in growth. “In conjunction with the sequentially falling inflation and an adverse global environment, the latest industrial production print shows the extent of the decline in domestic activity and further increases the likelihood that RBI would pause,” they said.
In its first quarter policy review in July, RBI said a change in stance would be motivated by signs of a sustainable downturn in inflation. But food inflation is likely to remain above nine per cent and core inflation may stand at around 7.5 per cent—above RBI's comfort level, said CARE Ratings chief economist Madan Sabnavis. “There is a good case to believe RBI would go for a rate rise of 25 basis points during the September policy review,” he said.
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Inflation is expected to remain elevated on account of high commodity prices globally.
“In a scenario when it is becoming hard to understand not only the magnitude, but also the direction of both the investment and the demand conditions, IIP growth is expected to remain subdued during the coming two quarters,” said D&B India senior economist Arun Singh.
Economists have also said RBI may opt for a pause in monetary tightening after the review this week. “As signs of a moderation in growth are becoming more evident—implying weaker inflation pressures ahead—we believe it would be difficult for RBI to maintain its anti-inflation bias for an extended period. We do not expect RBI to raise rates again in this cycle after September 16,” said Nomura Securities economists Tomo Kinoshita and Aman Mohunta.